Efficient Tests of Balances Series—No. 10: Minimizing Audit Procedures for Accounts Receivable

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Similar to my discussion in a previous blog on cash auditing procedures, learning “how” to audit accounts receivable is mainly learning to “what extent” auditing procedures should be applied.  The amount of audit work necessary depends on risk of material misstatement (RMM) evaluations at both the financial statement and classification (assertion) levels. For example, when RMM is low at the financial statement and assertions level for accounts receivable, substantive procedures may be significantly reduced.  Substantive procedures may, in these circumstances, consist of the most effective analytical procedures, the most efficient confirmation procedures and an analysis of the adequacy of the allowance for doubtful accounts.

My focus in this blog is on learning how to perform only the procedures that are required based on the applicable assessed levels of RMM. Since sending confirmations is the principal procedure for evaluating the existence assertion, a brief summary of the impact of the assessed level of RMM follows:

High assessed RMM:

Send positive confirmations for all individually significant items (ISIs) above the calculated lower limit based on the RMM level and a number of units from the sampling population determined by using a non-statistical sampling model or an extensive non-sampling plan  at the reporting date.

Moderate assessed RMM:

Send positive confirmations covering all ISIs above a higher calculated lower limit based on the RMM level and a small number of units in the sampling population based on the model approach or a non-sampling plan at the reporting date or one month before. Perform roll-forward procedures for the period from the confirmation date to the reporting date.

Low assessed RMM:

Send positive confirmations for all ISIs above a calculated lower limit based on the RMM level (which lower limit should be higher than for moderate risk). A small number of larger units may also be judgmentally selected for positive confirmation from the sampling population that are representative of the nature of the transactions it includes. If the sampling population consists primarily of smaller, homogeneous balances, a non-statistical model approach may be used to determine the number of negative confirmations and/or alternative procedures that may be necessary.  Confirmation procedures may be performed 30 or 60 days before the engagement date with appropriate roll-forward procedures.

These and other efficient auditing procedures are discussed in the live and on-demand webcasts in my Basic Staff Training Series.  You can download syllabuses and register by clicking the appropriate box on the left side of my home page, www.cpafirmsupport.com.



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